GLOBAL EDITION
MULTINATIONAL
BUSINESS FINANCE
12TH EDITION
David K. Arthur I. Michael H.
EITEMAN STONEHILL MOFFETT
University of California, Oregon State University Thunderbird SchoolLos Angeles and the University of Global Management of Hawaii at Manoa
Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto
PART I G l o b a l F i n a n c i a l E n v i r o n m e n t 1
Chapter 1 Globalization and the MyBtiBnatiomaO Enterprise 2
Globalization and Creating Value in the Multinational Enterprise 3 The Theory of Comparative Advantage 4
What Is Different about Global Financial Management? 7
Market Imperfections: A Rationale for the Existence of the Multinational Firm 8 The Globalization Process 9
Summary Points 13
MINI-CASE: Porsche Changes Tack 13
Questions • Problems • Internet Exercises 19
Chapter 2 Financial Goals and Corporate Governance 22
Who Owns the Business? 22
What Is the Goal of Management? 24 Corporate Governance 28
Summary Points 40
MINI-CASE: Governance Failure at Enron 41
Questions n Problems n Internet Exercises 45
Chapter 3 IDie international Monetary System 50
History of the International Monetary System 50 Contemporary Currency Regimes 56
Emerging Markets and Regime Choices 62 The Birth of a European Currency: The Euro 64 Exchange Rate Regimes: What Lies Ahead? 69 Summary Points 70
MINI-CASE: The Revaluation of the Chinese Yuan 71
Questions • Problems • Internet Exercises 74
Chapter 4 International Business Transactions: The BaBance of Payments 78
Typical Balance of Payments Transactions: China 79 Fundamentals of Balance of Payments Accounting 80 The Accounts of the Balance of Payments 81 The Capital and Financial Account 83 The Balance of Payments in Total 89
The Balance of Payments Interaction with Key Macroeconomic Variables 91 Trade Balances and Exchange Rates 94
Capital Mobility 97
Summary Points 99
MINI-CASE: Turkey's Kriz (A): Deteriorating Balance of Payments 100
Questions • Problems D Internet Exercises 102
Chapter 5 Current Multinational Financial Challenges: The Credit Crisis of 2007-2009 106
The Seeds of Crisis: Subprime Debt 106
The Transmission Mechanism: Securitization and Derivatives of Securitized Debt 109 The Fallout: The Crisis of 2007 and 2008 120
Contents xv
The Remedy: Prescriptions for an Infected Global Financial Organism 129
Summary Points 131
MINI-CASE: Letting Go of Lehman Brothers 132
Questions D Problems • Internet Exercises 134
PART II Foreign Exchange Theory and Markets 137
Chapter & The Foreign Exchange Market 138
Geographical Extent of the Foreign Exchange Market 138 Functions of the Foreign Exchange Market 139
Market Participants 140
Transactions in the Interbank Market 142 Foreign Exchange Rates and Quotations 148
Summary Points 156
MINI-CASE: The Venezuelan Bolivar Black Market 157
Questions D Problems a Internet Exercises 160
Chapter? InternationaB Parity Conditions 164
Prices and Exchange Rates 164 Interest Rates and Exchange Rates 172
Forward Rate as an Unbiased Predictor of the Future Spot Rate 181 Prices, Interest Rates, and Exchange Rates in Equilibrium 183
Summary Points 184
MINI-CASE: Currency Pass-Through at Porsche 185
Questions • Problems • Internet Exercises 186
Appendix: An Algebraic Primer to International Parity Conditions 193
Chapter 8 Foreign Currency ierivatoves 197
Foreign Currency Futures 198 Currency Options 201
Foreign Currency Speculation 203 Option Pricing and Valuation 210 Currency Option Pricing Sensitivity 213 Prudence in Practice 221
Summary Points 222
MINI-CASE: Warren Buffett's Love-Hate Relationship with Derivatives 223
Questions • Problems • Internet Exercises 226 Appendix: Currency Option Pricing Theory 230
Chapter 9 Interest Rate and Currency Swaps 234
Defining Interest Rate Risk 234 Management of Interest Rate Risk 237
Trident Corporation: Swapping to Fixed Rates 245 Currency Swaps 246
Trident Corporation: Swapping Floating Dollars into Fixed Rate Swiss Francs 247 Counterparty Risk 249
Summary Points 250
MINI-CASE: McDonald's Corporation's British Pound Exposure 251
Questions n Problems • Internet Exercises 252
Chapter 10 Foreign Exchange Rate Determination and Forecasting 2S6
Exchange Rate Determination: The Theoretical Thread 257 The Asset Market Approach to Forecasting 260
Disequilibrium: Exchange Rates in Emerging Markets Illustrative Case: The Asian Crisis ^262
Illustrative Case: The Argentine Crisis of 2002 265 Forecasting in Practice 270
Summary Points 274
MINI-CASE: JPMorgan Chase's Forecasting Accuracy 274
Questions • Problems • Internet Exercises 276
262
PART III Foreign Exchange Exposure 281 Chapter 11 Transaction Exposure 282
Types of Foreign Exchange Exposure 282 Why Hedge? 284
Measurement of Transaction Exposure 287 Trident's Transaction Exposure 289 Management of an Account Payable 297 Risk Management in Practice 299
Summary Points 300
MINI-CASE: Xian-Janssen Pharmaceutical (China) and the Euro
Questions D Problems D Internet Exercises 303 Appendix: Complex Options 312
301
Chapter 12 Operating Exposure 320
Attributes of Operating Exposure 320 Illustrating Operating Exposure: Trident 322 Strategic Management of Operating Exposure 326 Proactive Management of Operating Exposure 329 Contractual Approaches: Hedging the Unhedgeable 336 Summary Points 337
MINI-CASE: Toyota's European Operating Exposure 338
Questions a Problems a Internet Exercises 340
Chapter 13 Translation Exposure
Overview of Translation 344 Translation Methods 347
Translation Example: Trident Europe 350
Comparing Translation Exposure with Operating Exposure Managing Translation Exposure 355
Summary Points 359
MINI-CASE: LaJolla Engineering Services 360
Questions H Problems • Internet Exercises 362
355
PART IV Financing the Global Firm 365
Chapter 14 The Global Cost and Availability of Capita! 36®
Weighted Average Cost of Capital 368
The Demand for Foreign Securities: The Role of International Portfolio Investors 373 The Cost of Capital for MNEs Compared to Domestic Firms 379
Solving a Riddle: Is the Weighted Average Cost of Capital for MNEs Really Higher Than for Their Domestic Counterparts? 380
Summary Points 382
MINI-CASE: Novo Industri A/S (Novo) 383
Contents xvii
Chapter 15 Sourcang Equity Globally 391
Designing a Strategy to Source Equity Globally 392 Foreign Equity Listing and Issuance 395
Effect of Cross-Listing and Equity Issuance on Share Price 397 Barriers to Cross-Listing and Selling Equity Abroad 399
Alternative Instruments to Source Equity in Global Markets 400
Summary Points 404
MINI-CASE: Petrobras of Brazil and the Cost of Capital 404
Questions • Problems a Internet Exercises 408
Optimal Financial Structure 410
Optimal Financial Structure and the MNE 411 Financial Structure of Foreign Subsidiaries 414 International Debt Markets 418
Summary Points 424
MINI-CASE: Tirstrup BioMechanics (Denmark): Raising Dollar Debt 424
Questions • Problems o Internet Exercises 426
PART V Foreign Investment Decisions 431
Chapter 17 International Portfolio Theory and Diversificationi. 432
International Diversification and Risk 432 Internationalizing the Domestic Portfolio 435 National Markets and Asset Performance 441
Summary Points 446
MINI-CASE: Is Modern Portfolio Theory Outdated? 447
Questions a Problems • Internet Exercises 448
Chapter 18 Foreign Direct Investment Theory and Political Risk 452
Sustaining and Transferring Competitive Advantage 452 The OLI Paradigm and Internalization 455
Deciding Where to Invest 457
How to Invest Abroad: Modes of Foreign Involvement 458
Foreign Direct Investment Originating in Developing Countries 462 Foreign Direct Investment and Political Risk 464
Assessing Political Risk 465 Firm-Specific Risks 466
Country-Specific Risks: Transfer Risk 469
Country-Specific Risks: Cultural and Institutional Risks 472 Global-Specific Risks 476
Summary Points 479
MINI-CASE: Mattel's Chinese Sourcing Crisis of 2007 480
Questions a Problems a Internet Exercises 483
Chapter 19 Multinational Capital Budgeting 487
Complexities of Budgeting for a Foreign Project 488 Project versus Parent Valuation 489
Illustrative Case: Cemex Enters Indonesia 490 Real Option Analysis 502
Project Financing 503
Summary Points 505
MINI-CASE: Trident's Chinese Market Entry—An Application of Real Option Analysis 505
PART VI Managing Multinational Operations 513
Chapter 20 Multinational Tax Management 514
Tax Principles 514 Transfer Pricing 522
Tax Management at Trident 524
Tax Haven Subsidiaries and International Offshore Financial Centers 525
Summary Points 527
MINI-CASE: Stanley Works and Corporate Inversion 527
Questions • Problems n Internet Exercises 531
Chapter 21 Working Capital Management 535
Trident Brazil's Operating Cycle 535 Trident's Repositioning Decisions 537 Constraints on Repositioning Funds 539
Conduits for Moving Funds by Unbundling Them 539 International Dividend Remittances 540
Net Working Capital 542
International Cash Management 548 Financing Working Capital 552
Summary Points 556
MINI-CASE: Honeywell and Pakistan International Airways 557
Questions • Problems n Internet Exercises 559
Chapter 22 Global Petroleum Development: Fiscal Regimes and Funding 565
Financing Petroleum Development 566 Fiscal Regimes 566
Development Agreements 566 Concessions 569
Royalty/Tax Systems 570
Production Sharing Agreements 572 Service Agreements 574
Added Contractual Features 576 Top-Line Risks 578
Petroleum Prices 579
A Hypothetical Sub-Saharan PSA 581 PSA Evolution 584
Funding Petroleum Development 587
Summary Points 590
MINI-CASE: Petroleum Development and the Curse of Oil 590
Questions • Problems o Internet Exercises 593
Answers to Selected Problems 595 Glossary 598
Index 610 Credits 627
